‘RBI move can help cap rupee slide at 72 levels’

A steady rise in crude oil prices and the possibility of rate hikes by the US Federal Reserve pushed the rupee to a 16-month low on Wednesday. Singapore-based NIZAM IDRIS, managing director, head of strategy – fixed income and currencies, Macquarie Bank, tells PuneetWadhwa that the rupee can easily hit 70.0 against the dollar. Edited excerpts:

What is your outlook for the Indian rupee?

Given the broad current market conditions, the rupee can easily hit 70.0 against the dollar, not just driven by domestic factors but also the rising broad pressure on Emerging Market (EM) currencies as funding costs rise. Twin-deficit economies, such as India, will face funding pressure, which is then translated into higher domestic yields and weaker currencies. The question is: How far can it go beyond 70? The answer could lie in the tradeoff between the desire to stabilise the exchange rate and to preserve foreign reserves. The Reserve Bank of India (RBI) has a lot of reserves and the purpose of accumulating them is, to a large degree, to help battle massive pressure on the currency. This is the time to use those reserves for currency stability. This, we think, could help to cap the rupee at 72 in the months ahead.

Do you see the fiscal and current account deficit spiralling out of control ahead of the general elections scheduled for 2019?

In this environment, economies with large fiscal and current account deficits will inevitably face higher funding costs. India is one such economy. The world of cheap money is no more. This means there will be a more urgent need for prudence. Political exigencies ahead of the 2019 election would likely add to the complications for India. We expect Indian bonds to come under pressure from rising global yields, higher domestic inflation — already the April consumer price inflation (CPI) data surprised to the upside — increasing pressure for the RBI to hike rates in the second half of 2018 and possibly a larger bonds issuance plan to all push Indian yields higher in the months ahead. Failure to hike rates in the second half of CY18 would be good for Indian equities in the immediate term, but not for bonds.

The RBI is banking on a normal monsoon and benign inflation as regards key interest rates. How realistic are the forecasts?

With some luck on the weather, India

NIZAM IDRIS MD, head of strategy, fixed income & currencies, Macquarie Bank

has been very successful in keeping food prices under control in recent years. This may have encouraged the RBI to price in lower risks of large food inflation in the months ahead. We understand such a view. As always, when it comes to the monsoon though, the tail risks are large. The doubling of global oil prices too may contribute to food production costs. Trade disputes, too, may mean large shifts in China’s demand, which could alter global food prices. Without considering weather-related risks, we think these factors are likely to mean asymmetric risks to the upside in food prices in the months ahead.

What’s your view on inflation in India?

Macquarie expects headline inflation to average 4.7 per cent this year but with a clear upside risk (more so in the core measure from our 6 per cent forecast). We expect the RBI to hike key rates twice in the first half of calendar year 2019 (1HCY19). But the risks of an earlier hike are rising, especially after the overshoot in the April inflation numbers.